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Global Steel 2013 a New World, a New Strategy

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Global Steel 2013 a New World, a New Strategy Global steel 2013 A new world, a new strategy Contents Executive summary 4 Maintaining value in volatile economic 1 conditions — a look at the year ahead 6 2 Is there value in vertical integration? 10 3 Striving for strategic cost reduction 14 Optimizing capital — maximizing returns 4 for shareholders 18 5 Chinese steel sector 22 Is India on track to become the next 6 steel powerhouse? 30 Other key producer countries 7 outlook 2013 36 Executive summary “ Controlling raw material costs is a benefit of vertical integration; however, steelmakers should critically assess the value of vertical integration and consider possible alternatives to help mitigate the cost of raw materials.” Mike Elliott Global Mining & Metals Leader, Ernst & Young Global steel — will 2013 be the bottom of the producers need to assess and address whether they are best set trough? up for the new operating environment: • Is there value in vertical integration? Despite a slight increase in demand for steel and the removal of some older steelmaking capacity in 2012, the global percentage • Strategic cost reduction for survival and future growth level of excess capacity is greater now than it was 12 months • The optimal capital structure for the future business model ago due to the continued growth in new steelmaking facilities particularly in developing economies. Is there value in vertical integration? Capacity utilization rates in the sector remain below 80%, and in In recent years, many steelmakers have integrated raw material 2013 excess capacity will remain the most significant issue in the (coal, iron ore) mines into their supply chains. However, new steel sector. analysis by Ernst & Young suggests that despite the benefits in Growth in global steel demand is unlikely to improve significantly controlling raw material costs, it may not always have a positive in 2013. Sluggish demand combined with excess steelmaking benefit on enterprise value. capacity and ongoing volatility in raw materials costs will Steelmakers should critically assess the value of vertical challenge the sustainability of high-cost producers. integration to their business and consider alternatives to The continued closure of older, higher-cost steelmaking managing raw material costs and supply, such as long-term capacity and increased demand growth should lead to improved contracts with suppliers and relocating production sites closer to profitability for the sector in 2014 and 2015, driven by better upstream suppliers. utilization rates. The closure of inefficient capacity will require the Strategic cost reduction sector to avoid political interference with commercially rational decisions. With continuing weak market conditions, cost reduction activities Restoring sustainable value are essential for steelmakers’ sustainability and future growth. While these activities are necessary, it is crucial that steelmakers Ernst & Young’s 2012 steel report detailed the importance of do not move away from their overall company strategy, thus customer reach, operational agility, cost competitiveness and potentially causing further value erosion. stakeholder confidence for producers to remain profitable. In this report we discuss the different approaches that are These remain priorities for 2013. currently being used to reduce cash operating costs, including: The big challenge for steelmakers in 2013 is how to be cost • Reducing production volumes from loss making plants to competitive while maintaining enterprise value. To achieve this, stabilize steel prices and address oversupply in the market 4 Global steel 2013 Executive summary • Restructuring labor Is India on track to becoming the next steel • Canceling or reducing supply contracts powerhouse? Optimizing capital Although China is the dominant market in the steel sector, India is increasing its presence in the global steel market as a result of Today’s economic environment is forcing steelmakers to assess domestic steel consumption. The rising middle class population whether their capital structure is optimized for the new operating coupled with increased urbanization will grow steel intensity in the environment. Companies must objectively review the alignment economy. India has seen a rapid rise in production over the past of their asset portfolios to their business strategies. The goal few years, which has resulted in India becoming the fourth largest for companies is the optimal allocation of capital to maximize producer of crude steel and the largest producer of sponge iron in shareholder returns and achieve the most efficient capital the world. structure. As a result, an increasing number of corporate boards are putting greater focus on the key drivers of efficient capital There are many opportunities that are helping grow the Indian allocation. steel market. These opportunities include: This focus is extremely relevant to steelmakers because falling • Rural demand picking up demand and oversupply in regional markets have led to short- • Investment planned in road sector term liquidity challenges that may threaten credit ratings and debt covenants. Capital management today includes: • Indian railway expansion • Building in options • Automobile and power sectors offer opportunity for specialized steel • Capital raising • Refocus on manufacturing • Divesting non-core assets However, there are also some challenges that India must China restructuring overcome in order to continue on the path of becoming the next steel powerhouse. These challenges include: China remains the largest market in the steel sector, even though it experienced lower steel demand, overcapacity, a • Land acquisition and environment regulations fragmented industry and weak profit margins in 2012. The • Shortage of coking coal Chinese government aims to address these challenges through its 12th Five-Year Plan (FYP), which represents China’s goal to • Availability and pricing of domestic iron ore rebalance its economy and shift the focus from investment toward • Downstream value addition consumption and move development from urban areas to rural areas.1 In terms of the steel sector, the 12th FYP focuses on • Insufficient infrastructure and logistics promoting the use of modern technology, energy efficiency and • Overburdened port facilities improved product quality. • Adoption of modern technology Successful execution of the 12th FYP policies will not only help contribute to the domestic and global steel demand, but also promote the production of value-added steel. 1 “China’s rebalancing push needs tailor-made policy,” Shanghai Daily, 20 December 2012, Factiva, http://global.factiva.com/ha/default.aspx. Global steel 2013 5 01. Maintaining value in volatile economic conditions — a look at the year ahead Steelmakers are challenged In addition to the adaptation factors raised in Ernst & Young’s by weak global growth; need Global steel 2012: competing for growth in the steel sector, steel producers must also be considering for 2013: for structural change, limited availability of finance and high • The continued appropriateness of the vertically integrated model raw material prices. The existing • The embracing of more flexible cost structures and overall paridigm for steel production reductions does not really work well for this • Optimizing capital structures and allocations new operating environment. As the largest and most dominant market in the steel sector, China continues to surprise, both in its size and dynamism. But as China heads toward its peak, India is picking up the pace and increasing its presence in the global sector. This silent achiever is becoming the market to watch. Ramona Cheng Americas Markets Steel takes its place in the global Leader — China economy Business Network, Ernst & Young The world economy is expected to have grown by 3.3% in 2012 and grow 3.6% in 2013.2 This growth is primarily driven by “As the world’s largest supplier the BRIC nations, with most of this growth coming from China and consumer of steel, China’s and India. They expect to have grown, respectively, at 7.6% structural adjustments and and 5.1% in 2012 and will grow 7.8% and 5.8% in 2013.3 But sustainable transformation in these consolidated growth numbers are less than revealing of its steel sector will have global the underlying uncertainty in the global economy, especially in Europe and the US. The US economy is expected to grow by ramifications.” around 2% in 2012 and 1.8% in 2013.4 The European Union (EU) is expected to decline 0.5% in 2012 and 0.3% in 2013.5 2 IHS Global Insight. 3 IMF. 4 IHS Global Insight. 5 IHS Global Insight. 6 Global steel 2013 Figure 1. Real GDP forecast of major steel-producing countries Figure 2. Global steel capacity utilization 10 95 90 8 85 Emerging� 80 6 75 economies:� % h t growing faster 70 w 4 ro 65 % g 60 2 55 50 0 Developed� economies:� somber growth -2 Jul 2008 Jul 2009 Jul 2010 Jul 2011 Jul 2012 Jul Oct 2008 Oct 2009 Oct 2010 Oct 2011 Oct 2012 Oct Apr 2008 Apr 2009 Apr 2010 Apr 2011 Apr 2012 Apr 2011 2012e 2013f 2014f 2015f 2016f 2008 Jan 2009 Jan 2010 Jan 2011 Jan 2012 Jan US Eurozone Japan China India Source: World Steel Association (utilization data comprises 170 steel-producing Source: IHS Global Insight, Ernst & Young analysis companies) The steel market in 2012 and 2013 Figure 3. Outlook — steel production and consumption 1,000 Sluggish demand growth and range-bound steel prices are 900 predicted in 2013. Steel prices, which had significantly weakened 800 700 in the last few months of 2012, will find support from production
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